A side note would be for real estate investors. It would behoove any real estate investor to research the Savings and Loan crisis of the 1980’s. The government is taking similar actions as it did then. The bailout is a bailout because everyone realizes that the securities that the government will be purchasing in exchange to fund banks will virtually be worthless. Just like they where in the Bear Stearns deal. So the government buys assets they ultimately know will fail. Once the assets (i.e. government owned real estate) fail they will be auctioned off at substantial discounts. What all this means is that savvy investors stand to make millions on the soon to come government bail out(s).

1. Freddie & Fannie are too big, and the government has allowed them to be implicitly guaranteed too long. That should never have happened. They should have been broken up into smaller companies and the Fed should have made it abundantly clear that no special treatment would be available.

But while true, the above is water under the bridge. It can’t be fixed now. It should have been fixed years ago, but no recent Congress or Administration has shown that kind of foresight or leadership.

2. A bailout is “money without payback.” It’s just a check. The above is either a loan or a equity dilution. Loans have to be paid back. Equity, once diluted, must be purchased back to regain equity.

One must presume that the Fed would unload any equity position into the market once the crisis has passed. It’s not a perfect solution, but none of the good choices are available to us now.